Disposable income fell sharply in the fourth quarter of 2016.
Photograph: Yui Mok/PA

British households ran down their savings to a record low at the end of 2016, raising fears that the UK is on course for a fresh consumer debt crisis in the wake of the Brexit vote.

The saving ratio – which estimates the amount of money households have available to save as a percentage of their total disposable income – fell sharply in the fourth quarter last year to 3.3% from 5.3% in the third.

It was the lowest since records began in 1963, according to the Office for National Statistics (ONS), and suggested that people are increasingly dipping into their savings to maintain spending at a time when prices are rising. A fall in disposable incomes over the fourth quarter also raised concerns that people will increasingly rely on debt-fuelled spending as a squeeze in living standards takes hold.

“Today’s figures should set alarm bells ringing. The last thing our economy needs right now is another consumer debt crisis,” said the TUC general secretary, Frances O’Grady. “But with wage growth stalling and prices rising, many households are having to rely on credit cards and loans to get through the month. People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash.”

This week, the Bank of England said rapid growth in consumer credit, underpinned by an acceleration in credit card borrowing, was one of the main threats to the UK banking system. Real household disposable income, which adjusts for inflation, shrank by 0.4% compared with the previous three months, the steepest drop in nearly three years.

UK economic growth since the financial crisis has been heavily reliant on consumer spending. The ONS confirmed that the wider UK economy grew by 0.7% between October and December, but economists said a weaker consumer backdrop could hinder growth in the coming months. Growth in 2016 was unrevised at 1.8% as the ONS updated its estimates.

Martin Beck, a senior economic adviser to forecasting group the EY Item Club, said the falls in savings and disposable income were “worrying signs” for the health of household finances, not least because inflation is expected to climb higher.

“Given that this pre-dates the worst of the inflationary pressures, it provides further evidence that 2017 is likely to be a very tough year for the consumer, with little or no scope to offset the headwinds from higher inflation by borrowing more,” Beck said.

Rachael Griffin, a financial planning expert at fund manager Old Mutual Wealth, said the figures were a “wake-up call” for people who were prioritising short-term spending over financial security.

“A worrying number of households do not have any sort of cash savings or insurance to protect against financial difficulty if life throws unexpected challenges at them. Building up a cash buffer to cover at least three months of essential spending is a sensible first step,” she said.

The saving ratio rose sharply in the aftermath of the financial crisis but has been falling since the second half of 2015 as stronger growth in consumer spending has outweighed the rate of growth in household disposable income.

The ONS said the sharp drop in the fourth quarter was partly due to technical reasons, including changes in pension fund investments. Pension companies have moved significant amounts of their investments out of high-yield shares into lower-yielding government bonds, reducing the income earned by households from pension funds.

But the statistics office also said there had been a noticeable deterioration in people’s perception of the general economic backdrop and their own financial position.

Commenting on the latest estimate of fourth quarter growth, the head of GDP at the ONS, Darren Morgan, said: “Growth in the final quarter remained unrevised at 0.7%, with buoyant contributions from the retail and wholesale sectors in the run-up to Christmas. Services dropped slightly in January with weak performances from hotels and the motor trade. However, the long-term picture is still one of robust growth.”